The Swiss private bankers should be a model for bankers everywhere (and the lost Indian ones)…

Mention Swiss banking and we either have the image of them as hiding wealth of uber rich across the world or the UBses of the world. But the region also has a much lower profile and glamorous set of bankers called Swiss Private bankers. They are these century old bankers which have held the principles of banking for a long time.

The strong showing in banking stocks may show some optimism following the presidential election victory of Donald Trump. But, a healthy future for US banking will only take root if that industry comes to terms with the original purpose for which banking was intended — wealth management. As such, the great American bank in generations to come will not be of the calamitous Wells Fargo or Bank of America type — or even Facebook’s Electronic Money Institution license or Google’s Mobile Wallet. The most solid banks will be remakes of that timeless classic, the Swiss private banker. It is this “back to the future” philosophy of banking, already prevalent in some of the past decade’s best performing and least known banks in the US, that must become predominant if that sector is to remain resilient……

The focus instead must be on the cultivation of localized, community-centered but nationally ambitious banks that one rarely reads about amid the stories of pointless bail-outs, fake-account scandals, ZIRP, and robo-trading. Superbly managed and often family-owned, these banks profited throughout the post-crisis period, enduring regulatory mayhem, Fed mission-creep, and the rise of ‘alternative banking” fintech and mobile-app technologies. They did it by sticking to sound fiscal fundamentals and never underestimating the “psychological” preference on the part of the public for sturdy institutions whose owners or managers are members or descendants of that founding banking family itself. Though PriceWaterhouseCoopers gloomily predicted that traditional banking would not survive beyond 2025, it is precisely highly successful banks like Beal Bank of Dallas, Texas, or the 100 year-old Bank of Fayette County in Tennessee, that will be the only banks to survive the next decades and beyond.

These Private Bankers are not Private banks:

To understand the real next-generation banking, let us look to the forefather role model that embodies the very best of ultra-traditional banking principles: Switzerland’s national legend, the unlimited liability banquier.No American bank, including the two examples mentioned above, follow this ‘severe’ Swiss model. Still, such Geneva, Zürich, and Basel-based aristocratic workhorses in the art of wealth management and no-frills (not even on-line) banking are the kinds of institutions where money still means gold and Ms. Yellen’s machinations an amusing, yet comfortably distant, American curiosity.

First off, a nuance of definition. The expression is “Swiss private banker,” and not “private bank,” or “private banking.” This first refers to a very specific institution, defined by 1934 Swiss law and, as an expression (“Swiss private banker”), is a registered trademark. These are not UBS- or Credit Suisse-type banks (which are, for all intents and purposes, American banks), nor simply lesser-known tax-evasion vehicles shrouded in glamorous secrecy. Instead, the term refers to a narrowly defined privileged few “houses,” often centuries old and almost always still family owned, that, by law, must adhere to unheard-of (on these shores) personal liability among their partners and high reserve requirements, among other standards. Indeed, in the last three years alone, the number of these banks has dwindled from twelve to six, as pressures from the global economic crisis forced several of them into limited liability companies.

They are in a class of their own, synonymous with unbounded responsibility. The six remaining are: Baumann et Cie.; Bordier et Cie.; E. Gutzwiller et Cie; Mouge d’Algue et Cie; Rahn & Bodner; and Reichmuth & Co. “Private bankers” as these are: (1) exclusively organized in the legal form of a partnership or limited partnership; (2) run by partners who are usually family descendants of the banks’ founders; (3) invest their own capital in their banks and maintain high cash reserve ratios; (4) defined by a special private-banker status that is dependent upon the presence within management of one or several partners with unlimited liability for investment obligations. This last is their greatest distinction. Other Swiss banks offer wealth management services but their maximum liability is confined to equity capital. With private bankers, liability is not solely limited to the company equity, but partners are additionally liable with their private assets.

Thus, their primary duty is to their clients, to their own families, and to their own vested responsibilities — a quaint notion these days, to be sure. They are run by a flat management structure; decision-making chains are short; they do not develop their own products and are therefore not subject to any conflicts of interest in investment advice. Investments must be tradable and liquid at all times; bankers can’t act as brokers and they are not on-line banks. They are not allowed to sell their own instruments, tend not to invest in global real estate, and, as mentioned before, have strict rules on reserves.

India too had these bankers which were called as indigenous bankers. They were called as Shroffs, Multanis, Marwaris, Chettiars and so on. But they have all disappeared from the mainstream banking scene. They were mostly given bad names by the media and experts alike failing to look at how some of them actually excelled in banking for many years and even centuries. Some of them like Chettiars in Madras even used their banking skills to form joint stock banks like Indian Bank, Indian Overseas Bank, Karur Vysya Bank and Laxmi Vilas Bank and so on.

There was this tiff between the Government/RBI and Indian Private Bankers. The former wanted them to be regulated as per banking regulations which latter refused as they found the regulations highly restrictive and so on. Till the 1970s there were efforts between the two but now we hardly hear about them.